UK Gilt Yields Rise on Inflation Fears, Political Uncertainty

UK 10-year gilt yields climbed back above 4.95% as rising oil prices, driven by escalating tensions between the US and Iran, heightened inflation concerns and reinforced expectations of further Bank of England rate hikes. Investors also continued to assess the fallout from last week’s UK local elections. Brent crude surpassed $105 per barrel after President Trump dismissed Iran’s latest peace proposal as “totally unacceptable.” The fate of the Strait of Hormuz remains uncertain, as reports from The Wall Street Journal suggested Iran had offered to dilute some enriched uranium and transfer the remainder to a third country, a claim Iran denied. Domestically, Prime Minister Keir Starmer is set to deliver a key speech on Monday aiming to reassure Labour MPs of his leadership amid heavy election losses and growing speculation of a potential challenge. On the macro front, REC/KPMG data showed hiring for permanent positions in the UK fell at the fastest pace in three months in April.

UK 10-year gilt yields extended their decline to 4.85%, the lowest since April 20, as Prime Minister Keir Starmer pledged to remain in office despite early election results showing significant losses for his Labour Party. Nigel Farage’s Reform UK made gains in English council elections, while Labour lost hundreds of seats, though the decline was less severe than some of the worst-case scenarios. Still, many results are expected to be announced after markets close today and into the weekend. At the same time, optimism over a potential US-Iran peace deal eased fears that persistent inflation could keep interest rates elevated for longer, after President Trump insisted the ceasefire remained "in effect" despite recent clashes. Financial markets still expect the Bank of England to deliver two rate hikes by year-end.

UK 10-year gilt yields fell to 4.95% as investors processed the outcomes of local and devolved government elections and weighed the implications of rising Middle East tensions. Early results indicate Nigel Farage’s Reform UK advanced in English council elections, while Prime Minister Keir Starmer’s Labour Party lost nearly half of the seats it was defending, though the losses were less severe than some of the direst forecasts. The Conservative Party, the main opposition, also suffered, losing over a quarter of its seats, while the Greens nearly doubled their representation and the Liberal Democrats gained ground. Meanwhile, tensions escalated as Washington and Tehran exchanged fire in southern Iran, driving Brent crude prices back to $100 per barrel, even as President Trump maintained that the ceasefire remained "in effect." Financial markets now expect the Bank of England to deliver around 60 bps of monetary tightening, or at least two interest rate hikes, by the end of the year.